It has been about a month since the last earnings report for Sallie Mae (SLM - Free Report) . Shares have added about 1.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Sallie Mae due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Sallie Mae Q1 Earnings Top Estimates on Solid Revenues
Sallie Mae delivered a positive earnings surprise of 13.3% in first-quarter 2019. The company reported core earnings of 34 cents per share, surpassing the Zacks Consensus Estimate of 30 cents. Moreover, the figure jumped 25.9% from the prior-year quarter.
Increase in net interest income, aided by rising rates, and elevated non-interest income, were tailwinds. The private education loan portfolio and deposits grew considerably. However, these positives were offset by elevated expenses and poor credit quality.
The company’s GAAP net income attributable to common stock came in at $154 million or 35 cents per share compared with $123 million or 28 cents per share reported in the year-ago quarter.
Rise in Net Interest Income & Other Income Offsets Higher Expenses
Net interest income for the first quarter came in at $402 million, up 20.7% year over year. This improvement was mainly driven by higher interest income on elevated loans. Net interest margin expanded 11 basis points (bps) year over year to 6.28%.
The company reported non-interest income of $16 million, up 23.1% from the prior-year quarter. This upside stemmed from rise in other income, partly offset by lower gains on derivatives and hedging activities.
The company’s non-interest expenses flared up 12% year over year to $140 million. The upsurge mainly resulted from increased compensation and benefits expenses, along with other expenses.
Efficiency ratio, on a non-GAAP basis, decreased to 33.8% from 36.5%. Generally, a lower ratio indicates improved profitability.
Credit Quality Worsens
Provision for loan losses was $64 million, up 18.5% from $54 million witnessed in the prior-year quarter.
Delinquencies as a percentage of private education loans in repayment were 2.5%, flat year over year.
Growth in Deposit and Loans
As of Mar 31, 2019, deposits of Sallie Mae Bank were $19.7 billion, up from $16.5 billion as of Mar 31, 2018. Increase in retail and other, along with brokered deposits, contributed to this upside.
As of Mar 31, 2019, the private education loan portfolio was $21.6 billion, up 16.1% year over year. Further, loan origination climbed 8% to $2.1 billion in the reported quarter. Average yield on the loan portfolio was 9.5%, advancing 66 bps.
Strong Capital Position
As of Mar 31, 2019, Sallie Mae Bank’s common equity Tier 1 capital was 11.9%, exceeding the “well capitalized” industry benchmark in regulatory requirements.
The company expects core earnings per share in the range of $1.23-$1.26 for the year.
Private education loan originations are projected to be $5.7 billion.
Management expects loan consolidations of about $1.25 billion in 2019.
The company expects full-year non-GAAP operating efficiency ratio to be between 35% and 36%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, Sallie Mae has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Sallie Mae has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.